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As loonie sags, pressure mounts on Ottawa to act

Pressure on Ottawa to dig deep into its economic stimulus tool kit intensified Wednesday as the Canadian dollar closed below 70 cents U.S. for the first time in nearly 13 years.

The loonie ended the day at 69.71 cents U.S., down 0.43 of a cent from Tuesday’s close, the first time it settled below the 70-cent mark since April 30, 2003.

The loonie settled Wednesday at 69.71 cents U.S., down 0.43 of a cent since Tuesday’s close. (MARK BLINCH / REUTERS)

Finance Minister Bill Morneau spoke at the Munk School of Global Affairs in Toronto on Wednsday Jan.13. The sinking dollar is putting pressure on Ottawa to fix the economy. (Peter Power / THE CANADIAN PRESS)

The turmoil comes at a pivotal time for policy-makers — both in the House of Commons, which controls fiscal stimulus measures such as infrastructure spending, and at the Bank of Canada, which controls monetary policy such as the overnight interest rate.

Finance Minister Bill Morneau faced questions during a pre-budget consultation tour about whether the government would deliver a larger stimulus in light of the current economic trouble.

Morneau declined to say whether the government will pull forward some of its $60 billion in infrastructure spending over the next decade in response to the deteriorating economy.

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“We’re paying very close attention to the economy,” he said. “We believe our plan to reduce taxes, our plan to add money to the Canada Child Benefit, and our plan to significantly increase investments in infrastructure will make a material difference.”

The Liberals promised during last fall’s election campaign to pour an additional $60 billion into infrastructure projects over 10 years. But less than half that money, $17.4 billion, was allocated to flow during the Liberals’ first term.

However, The Canadian Press reported the government is actively considering speeding up its infrastructure investments. The details of any new spending will be unveiled in the federal budget, likely sometime in mid to late March, the press agency reported.

Morneau also said the government is closely watching the decline in the Canadian dollar, but he declined to say how it might affect government spending plans. A lower dollar represents both challenges and opportunities for the economy, he noted.

The fall of the loonie is a symptom of many hardships hitting Canada’s resource-based economy, most notably heightened fears about the health of global trade and the severe drop-off in global oil prices. Benchmark crude closed at US$30.48 a barrel Wednesday.

The oil-price crash has rocked Canada’s oil sector, which accounts for about 10 per cent of the economy. Meanwhile, the positive effects of the decline in the petro-tied loonie have yet to work their way through the economy.

A growing minority of economists are calling for the Bank of Canada to shave interest rates from the current 0.5 per cent to 0.25 per cent in the upcoming interest rate decision set for Jan. 20.

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Interest rate cuts make borrowing money cheaper and also push the loonie lower, providing more support to Canada’s export sector. That foreign demand increases Canadian production levels and in turn supports employment.

Bank of Canada governor Stephen Poloz kicked off 2015 with a shocking interest rate cut in order to offset an oil-price crash. But in a speech in December, he was optimistic that the economy was turning a corner, though he also announced the bank will now consider negative interest rates as part of its tool box.

Economists expect the Canadian economy to disappoint Bank of Canada expectations of 1.5-per-cent growth for the fourth quarter of 2015 and question how the first quarter of 2016 can shape up much better.

A recovery in the Canadian manufacturing sector could take 3 to 5 years, while the trauma to the energy sector has been immediate and more persistent than many analysts expected, said TD Economics chief economist Beata Caranci.

“In light of the more protracted nature of the rotational adjustment, a more severe shock to the energy sector, and frequent bouts of imported financial market stress from emerging markets, a case exists for a rate-cut at the January 20th meeting.”

However, it’s unclear whether the low loonie will be able to stimulate the export sector as it has in the past. There has been a fundamental shift in the dynamics of that crucial industry due to the closure of 10,000 export-oriented businesses in the past decade alone.

At 70 cents U.S., the Canadian dollar may already be at a weak enough level to benefit the manufacturing sector — if Canadians are patient enough to wait it out, said Avery Shenfeld, chief economist at CIBC World Markets.

But a further depreciation in the dollar would make Canada more competitive against lower-cost producers such as Mexico, which remains a more attractive investment environment.

“The fact that we don’t have a $100 barrel of oil to export means that we need something else to sell to the rest of the world,” he said.

“Unfortunately, it’s going to take a weaker exchange rate to be more competitive in those other industries.”

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